If you're new here, this blog will give you the tools to become financially independent in 5 years. The wiki page gives a good summary of the principles of the strategy. The key to success is to run your personal finances much like a business, thinking about assets and inventory and focusing on efficiency and value for money. Not just any business but a business that's flexible, agile, and adaptable. Conversely most consumers run their personal finances like an inflexible money-losing anti-business always in danger on losing their jobs to the next wave of downsizing.
Here's more than a hundred online journals from people, who are following the ERE strategy tailored to their particular situation (age, children, location, education, goals, ...). Increasing their savings from the usual 5-15% of their income to tens of thousands of dollars each year or typically 40-80% of their income, many accumulate six-figure net-worths within a few years.
Since everybody's situation is different (age, education, location, children, goals, ...) I suggest only spending a brief moment on this blog, which can be thought of as my personal journal, before delving into the forum journals and looking for the crowd's wisdom for your particular situation.

This is a guest post from David Gross who blogs about tax resistance, frugality, ethics, and other such issues at his blog, The Picket Line. If you want to learn more about his tax resistance tactics, read the FAQ or check out his How-To Guide to learn how you can do it too. Regardless of whether you support the government, learning about the tax code, as demonstrated by the example below, can be much more remunerative than the standard comparative economics argument of “I earn $100/hour so I’m better off paying some $15/hour tax-clerk who took a two-week course to plug my numbers into his software.”

There’s a long history of frugality being used as a tactic by groups opposed to government policy including by the American Founding Fathers. During the first Continental Congress in 1774, John Adams wrote home to his wife:

Frugality, my Dear, Frugality, Economy, Parsimony must be our Refuge. I hope the Ladies are every day diminishing their ornaments, and the Gentlemen too. Let us Eat Potatoes and drink Water. Let us wear Canvass, and undressed Sheepskins, rather than submit to the unrighteous, and ignominious Domination that is prepared for Us.

Even if it’s not time for another American Revolution just yet, it’s certainly time for more Americans to put their money where their values are. We can vote for politicians every couple of years with a pencil at the ballot box (and a lot of good that does us), but we vote for what kind of world we want to live in every day, by deciding what to do with our lives and with the dollars we earn.

As it says in Your Money Or Your Life, “when we go to our jobs we are trading our life energy for money.” When you pay taxes, the government is taking your life energy from you and using it for its own purposes, as much as if it had conscripted you and forced you to work for it directly.

I don’t know about you, but I don’t want to spend any of my life energy helping the government to commit aggressive war, torture prisoners, or threaten the world with weapons of mass destruction. I think I can be more useful to my neighbors (and better able to sleep at night) if I instead put all of my effort into more beneficial activities.

In order to make our country one we can be proud of, complaining and wishful thinking are not going to be enough. We have to put as much of our effort as we can on the side of our values, instead of allowing so much to be stolen by the tax collector and used to promote the values of politicians and the military/industrial complex.

If you have a lower income, the IRS takes less from you, and so you can dedicate more of your energy to your own values. Almost half of American households already live “under the tax line” and pay no federal income tax at all. People who know they can spend their money more wisely and justly than the government does ought to see if they can get under the line themselves.

When the “shock and awe” assault on Iraq started, I quit my job and deliberately reduced my income to the point where I no longer owe federal income tax. I transformed my life, concentrating on what really matters, so that I can live within my means without paying this tax — honestly, peacefully, and legally.

Now I’m self-employed and do consulting work in the technical writing and web programming fields. I work full time for a few months out of the year, or part-time for a few more than that, and use the rest of my time for pursuits that don’t include the pursuit of income — including developing DIY skills like homebrewing, as well as organizing, volunteering, and agitating for a better world. Now I have a richer, happier, more well-rounded life than when I was an urban playboy making $100K and throwing cash around recklessly (including $15–20K in federal income tax every year).

I’ve reduced my expenses so that I live on about $19,000 a year, which is enough to pay for my food, Berkeley rent, health insurance, and the rest. I earn upwards of $30,000, but put the rest of it into various tax-sheltered accounts, like IRAs, HSAs, and SEP plans (this way, I also end up putting about a third of my income away for retirement or for emergencies). As a self-employed person, my health insurance payments are also tax-deductible. In some years I have also taken advantage of tax breaks for higher education, taking Berkeley extension courses to expand my skills or pursue new interests.

Here, for example, is how I eliminated my federal income tax burden last year:

Income & Deductions

Tax & credits

business income minus expenses

$32,822

capital lossesa

($3,000)

HSA deduction

($3,050)

1/2 of self-employment taxb

($2,128)

SEP deduction

($813)

self-employed health insurance deduction

($2,697)

IRA deduction

($5,000)

standard deduction

($5,700)

personal exemption

($3,650)

Taxable Income

$6,784

income tax at 10% bracket

$678

retirement savings contributions creditc

($678)

making work pay creditd

($400)

Total Income Tax

($400)

that’s what I get for trying to play the market

for complicated reasons, self-employed people are charged twice the rate of social security/medicare tax as people who are employees (sort of); but we can also take this extra contribution as a deduction for income tax purposes

David, This is excellent tax advice. How did you learn about these tax deductions/credits?

Scott said,

Maybe you should keep earning that $100k and donate the excess you’d have to pay taxes on to charity.

You would contribute more to society, both through increased productivity and financial assistance to those in need.

How about it? Do some good while still sticking it to the man?

Knobby Kabushka said,

All it takes it time to study tax code / tax pamphlets / tax books / etc. etc, or they can pay me $75 a hr and I can tell them what they need to do…

What David has layed out is a very simple plan but the key part of it is to be in business for yourself because then you can control you lifestyle to the max…

dmitry said,

Right on!
Thanks, David.

Tommy Vo said,

@David et al. Reminds me of a book “Twelve by Twelve” where ‘Dr. Jackie Benton’ lives off the grid & by only earning ~$11K as to avoid paying the war taxes.

Haha, I know of many people that whine and complain about companies and government. I often remind them they can vote with their money by not shopping there, or working less (after accumulating a substantial amt of wealth :D), or taking the max allowable deductions…or all of the above.

@Scott Uh, i think u may have missed David’s point. idk.

Scott said,

I think I get it.

He’s suggesting cutting his income by 66% is a morally superior action, taken to protest an unethical government.

I propose maintaining that income and donating it to his local charities (also elminating the tax revenue) is the morally superior path. As a specialist he will produce much greater value for his local community.

Now, if he just thinks it’s fun to not work so much and play his hobbies, that’s cool by me. I agree, it sounds awesome.

Mostly, the idea that cutting your income by 2/3 is a smart way to save on taxes annoys me. It’s a financially reckless decision, akin to lopping your arm off because your thumb hurts.

rjack ? I mostly learned about the credits and deductions that I use by reading the IRS’s “Publication 17” — the agency’s how-to guide for individual income tax filers. If I needed to delve further to make sure I knew how to qualify and if there was any fine print, I looked to other IRS documents. Oddly for a government agency, their website is pretty good: easy to search once you get the hang of it, and with all of the pertinent information available for download. You do have to wade through some technical verbiage, though, which can take a little patience. Most of the credits and deductions I mention in this article are pretty simple to deal with. The most complicated stuff I have to worry about is business expenses. Amortization is a bitch.

Scott ? It’s a common misconception that people can get under the income tax line by donating a sufficient amount to charity. I’ve run the numbers, and it’s not that simple. The first problem is that the deduction for charitable donations is an itemized deduction, so you have to donate enough to get your itemized deductions up to the same amount as your standard deduction before you even start to reduce your taxes. The second problem is that your deduction is typically limited to 50% of your adjusted gross income (even less for some types of charity). The third problem is that you take your itemized deductions after you calculate your adjusted gross income, so you can’t reduce your AGI that way and therefore can’t use this method to qualify for tax credits that require a low AGI (like the retirement savings tax credit I rely on). Every once in a while the government loosens some of these restrictions — for instance, in the wake of Hurricane Katrina they allowed people to make tax-deductible hurricane-related donations up to 100% of their AGI. These opportunities are difficult to predict, however, and only help with problem #2.

Built in to your responses also is the assumption that people are most productive and contribute most to society when they are engaged in money-earning activity. I don’t deny that there’s something to this — if you’re getting paid to do something, it’s presumably valuable at least to whoever is paying you. But I think there are lots of things that people do that they don’t get paid for that are every bit as valuable as things people do for money, and I’d be surprised if you couldn’t come up with a dozen examples yourself the next time you find yourself between shifts.

Also, I could see the persuasiveness of the lopping-off-your-nose-to-spite-your-face argument if I had actually become impoverished or my quality of life went down or I were no longer able to take care of myself or save up for emergencies. But none of that is true. My quality of life has gone up, I’m living a ridiculously comfortable first-world life that’s gotten subjectively better and objectively more well-rounded; I’m self-reliant and as confident in my future as one can be given the perilous state of the world and the slings and arrows of fortune.

mike crosby ? Very enigmatic, so I’m not sure how to respond. But you inspired me to go back and look at something I’d written 20 years ago. I’d just come back from a post-high-school Eurail-and-backpack jaunt with a friend, where I found a rind-covered camembert exotic enough to merit mention, and I was delighted by the commentary on the collapse of the Soviet Union I was reading in the Guardian and International Herald Tribune, comparing these to the writing in the New Republic, which was my idea of the pinacle of sophisticated political thinking at the time (I think it really was a much better magazine then, but still). I wonder where I’ll be 20 years from now.

I have also been in this position years back. Having a good tax person can be a valuable resource. But, I also have to say that what is more important to me than how much I pay is that the gov’t be fiscally sound and use the taxpayers money equitably and wisely. I know, people differ in opinion about what this means. It always amazes me that people get so upset about churches who collect the 10% tithe when taxes consume so much more. It’s all so much easier to pay when one thinks that their money is going toward things they support.

CB said,

Self-employed pay more social security tax because employers kick in part of the cost for their employees.

dan said,

@ Scott

You can only deduct charitable donations up to a maximum of 50% of your adjusted gross income, the rest has to be carried forward and deducted next year. Also deductions only reduce your earned income so they are only as good as your tax bracket. e.g. if you are in a 10% bracket a $1.00 deduction reduces your tax debt by 10¢ in a 25% bracket it’s worth 25¢.

On the other hand if you feel compelled o donate more you can always donate your time and talent. No deduction; but no taxable income either. It will also be worth a lot more to the charity than money.

TX said,

@Scott
Consider this:

“…most people have more than one principle to which they appeal as the basis for moral choice. The most commonly used principles, we find, are three in number:
• The ends-based principle of utilitarianism, which calls on us to do the greatest good for the greatest number. This principle, developed by the English philosopher John Stuart Mill and described by philosophers as a consequentialist or teleological concept, holds that ethics gets done when whatever I do produces consequences that turn out for the best. It focuses on arriving at good outcomes and results rather than on the motives or rules that guided us in our choices.
• The rule-based principle, by contrast, takes no account of consequences. It is commonly associated with the concept of the categorical imperative as articulated by the German philosopher Immanuel Kant. He formulated his principle this way: “I ought never to act except in such a way that I can also will that my maxim should become a universal law.” In Kant’s view, ethics gets done when whatever I do is something I’d like to see everyone else in the world do in similar circumstances. It asks us, in other words, to imagine that our action will establish a universal standard that will forever rule human decision making—so that everyone from now on will do exactly what we’ve just done in such situations. Depending not on outcomes, it is instead a deontological principle, from the Greek word deon, meaning “duty” or “obligation.”
• The care-based principle looks at a different determinant for our actions: what would we want others to do to us? It is rooted in the Golden Rule, a compassionate standard of great antiquity that lies at the core of all of the world’s great religions, including (though not limited to) the biblical religions of Christianity and Judaism. This principle of reciprocity or reversibility calls on us to imagine that we are in another’s shoes, about to be impacted by the very actions we’re contemplating. If we cannot confidently say that the action we’re taking toward another would be acceptable if taken toward us, then under this standard we’re about to do something unethical.
While we’ve given these principles three brief descriptive names—ends-based, rule-based, and care-based—there is nothing new about them. Each is drawn directly from the traditions of moral philosophy. Unlike the paradigms, each tends to operate in mutually exclusive ways: one sometimes counters the others, compelling the decision maker to set aside all but the one that creates the most satisfying understanding of what’s right.”

David, this is impressive. I am not an American, thus I feel less involved in the wars that you fight. But I can imagine how you must feel as an American, to be forced to pay taxes for something you totally, completely, a 100%, do not agree on.

I think you chose an admirable path. It is a path that not everybody can, or is willing, to follow. (Imagine if for example your sick parents, or your three young children, are dependent on your income). But it is admirable.

I use the deduction of charitable donations as well to reduce my taxes and to be more able to spend my money on things I value. But as many more have said here, you only get a partial deduction, so I keep paying some taxes for other things.

Dragline said,

While the reasons and motivations of people who choose to live more frugally vary, I’m not in favor of questioning someone else’s motivations. It seems divisive and counter-productive.

If we want to defeat the consumerist mentality of our society, or at least put a dent in it, and restore the idea of frugality as an important value, we’d be better off looking for common ground and applauding all of the reasons people might want to live on less, whether they be survival-related, freedom-related, religious-based, environmental, protest-related or something else (may a little green man told you it would be a good idea). This needs to cross political and social ideologies. We have much to learn from one another.

bptzdbyfyre said,

I would be interested in a discussion of whether making money in the “underground economy” (more commonly called under the table) is right or not.

David Gross is NOT making money under the table but on his blog he says he thinks it is okay to do.

George the original one said,

From the USA capitalist point of view, you can achieve the same effect by investing in municipal bonds.

Scott said,

I did not know about the personal limits on charitible deductions. I imagine a knowledgeable tax professional / lawyer could arrange a non-profit entity that gets around those for the individual. I really don’t know though.

The classes of moral arguments are interesting. I generally find use of morality to justify a behavior to be difficult, simply because the distinction between right and wrong is not so clear.

For instance, those lower income tax credits David is taking advantage of – are they really intended for someone of his means and ability? I doubt it. Sure the letter of the law lets him qualify, but he doesn’t sound exactly like the needy type of person who needs help.

I’d take them if I qualified though!

David is thriving in his chosen lifestyle. That’s great. It doesn’t mean his reasoning shouldn’t be questioned. We learn by asking questions. Further discourse also reveals he’s a pretty rational guy and a good writer on top of it.

LOL said,

I agree with Scott.
David has nothing to be proud of. Of course, there is nothing wrong with trying to play by the rules and try to reduce his/her taxable income.
But please stop with all the rightness crap. There is nothing noble about it. You are just using results of other people’s work.
If David wants to show his moral values then he should also refuse to receive any services from the government to follow up on his claims.
That would mean – don’t ever call police or firefighters (yes, they’ve been paid by Federal government as part of the last Stimulus plan), don’t listen to NPR (or at least donate money to it), no PBS, don’t use public roads (again, fuel tax/tag tax do not fully cover the repairs), and so on.
Of course, if someone is so naive that he thinks that his taxes were used to pay for Iraq war, then he just need to look at the US budget. Surprise… US government has borrowed the money to pay for it. So, it is future taxes or default, not the current tax receipts, will pay for it.

Long Term Capital Gain Tax is only 15%. Certain long term Dividends are also 0% if in the ten percent income tax bracket.
I will have to side with making $200k to invest in the above, live or rent cheaply/ in a small house, not waste money on extra wants or paying sales tax, prepare as much as you can for all security and emergency situations, and then create, create, create, innovate, and design a new world!

Kevin M said,

Did you specifically leave out the self-employement tax to come up with the negative tax (refund) or was that an oversight? I noticed the rest of your figures basically follow the Form 1040, so I found this curious. Instead of ($400) it would look more like $3,856* tax owed.

Petra => True, this path isn’t for everybody. If I had large debts or if other people were dependent on my income (or, as they say in the divorce papers, “accustomed to a certain lifestyle”), I might not have been able to go about it the same way. On the other hand, the examples you give (“sick parents, or… three young children”) are not necessarily disqualifying, since extra dependents are also extra dependents for tax purposes (that is, extra deductions), and there are even more credits and deductions you might be able to qualify for in such cases (for instance, setting up tax-advantaged savings accounts for your three kids’ higher education expenses).

George TOO => While you can earn interest on some government bonds without paying federal income tax on that interest, you have to be pretty well off (more than I am) or have very low expenses (less than I have) to be able to live off the interest without additional (potentially taxable) income. The riskiest and highest-rate municipal bonds these days pay what, 5%? And you’d probably want to reinvest at least some of that to keep your returns rising with inflation. But it’s worth doing the math. Of course, some government bonds are every bit as objectionable as taxes to the conscientious resister — just another way of giving the government money to do nefarious things. And the risk shouldn’t be discounted. The federal government often responds to its budget problems by devolving its mandates and responsibilities onto the states, and the states in turn shovel them on to local governments, so if America does start going belly-up, it may happen one bond-issuing district at a time rather than all at once, leaving those bondholders who were hoping for the best yields wishing they’d invested in something sounder than governments.

Kevin M => The chart in my article only covered the federal income tax, not other taxes (like the self-employment tax). It is much harder to get below the tax line for that tax unless you live substantially on investment income rather than earned income, which I’m not currently in a position to do (or unless you’re Amish, as they managed to get grandfathered out of the social security program). So in a typical year I will owe a few thousand dollars in self-employment tax. In this case, I resist by simply not writing the check. This is not quite as clean cut as my income tax avoiding technique, and means I get worried letters from the IRS every once in a while.

timo said,

I want to preface this reply by letting everyone in this conversation know that I intend no disrespect with what I am about to say. I don’t know the political makeup of the overall readership here. I may be preaching to the converted. I may be talking to a wall.

LOL is correct: Congress has been borrowing to pay for this war.

The troops are there already. Our presence will only be drawn down when it can be. We (as a nation) have political and financial stake in this war whether we like it or not. I don’t support it either, but I know they’re not going to change their minds about how much funding goes into it based on tax revenue. That never once entered the picture.

October 2008 and the months following didn’t see a significant decline in US military presence in the Middle East, when everyone could see a decline in tax revenue coming. Why would a smaller decline have a different result?

LOL is right again: Especially with the leanings of the new House of Representatives, the FIRST things to go are services: school funding, NEA, NEH, infrastructure, first responders (police, fire, EMS). It’s a fact.

I know a lot of us INTJ’s like to be as self-reliant as possible. I do, too. I guess I see the bigger picture in a different light, though.

I’m sorry if this offends anyone, but it’s my personal opinion that a government is supposed to care for its people, not just its businesses and borders. I’d like to see these legal persons known as corporations paying income tax on their net profits. I’d like to see a flat tax rate above the poverty line. I’d like to see closed tax code loopholes.

Unfortunately the only way I can see to do this is to completely and totally remove corporate campaign finance or gifts of any kind, including via PACs or lobbies. Corporations are realistically made up of individual people and their resources. The people already have their votes to cast. Anything more is a bribe.

Please don’t take for granted what services the government does provide for you. That’s the most vulnerable part of what it does. And that’s what we stand to lose in the current political climate. Without them, life would most certainly be more “nasty, brutish, and short” to paraphrase.

I think it’s misguided to think that being frugal will affect the war effort. I also think it’s perfectly acceptable to be frugal for personal (non-political or non-moral) reasons.

The reasoning in the post comes across as an unnecessary rationalization. I’m not judging Mr. Gross’s actions. He’s already made his money and paid taxes on it. That’s fine by me. I just think he’s voicing his dissent irrationally.

Apologies for ranting, and I hope this doesn’t set off a flame war.

…and maybe this should’ve just gone into the politics section of the forums? or the journal section?

Kevin M said,

You simply don’t pay S/E tax? I imagine at some point you’ll get more than a nasty letter from the IRS. Especially once they figure out you’re a repeat offender. The good ones say “INTENT TO LEVY” across the top. Good luck to you when the IRS reaches in your bank accounts.

drockel said,

You know there are many groups that don’t agree with something the government spends money on. If the Neo-cons stopped paying taxes like you because they don’t agree with stem cell research and the Racist white males stopped paying taxes because of affirmative action based spending etc, etc, etc …
The government cannot provide the services its people need with no money. I too am waiting for the troops to come home… from Europe and Japan and Korea (How long have those wars been over now?)
If we withdrew to America and only fought defensive wars you may get what you wanted and Europe would have to start investing in true military defense spending rather than its socialist Utopia while we foot the bill for Europe’s defense.
I love in the past how the anti war people sent in a percentage of what they owed recognizing otherwise they wanted their government to function.
You are enjoying services (local state and federal) which you did not pay for. You are therefore a parasite living off those who pay for those services. If everyone who had an objection stopped paying taxes (legal or not) the government would have to find a source of revenue some how or shut down. Not just the wars, but everything. Maybe they would start enlisting slave labor from its people taxing their labor and property from them rather than income.
Are you sure that your dollars are the ones being spent to fight wars as opposed to being spend on fighting poverty and curing aids in Africa?
Since the war doesn’t stop when you stop paying your taxes, I would argue that your dollars weren’t being used to pay for the war so you can safely start earning and paying taxes again. After all what is the harm in allowing people like Christopher Reed to walk by paying for research by paying your fair share of taxes for your roads and basic services.

very interesting post. I was hoping to read more on your blog, but every page seems to come up scrambled. Did you move your blog somewhere else? A few entries are available on goodreads.com, but it looks like not all of them.

Using SEP and IRA accounts to reduce tax in the present is a good strategy, but you are going to have to pay tax on those in the future through required distributions. And you can’t get out of those just by not writing a check because the monies will be withheld before you even get your hands on them.

An interesting idea. There’s plenty of things to hate about the way the government spends my hard earned money. The problem is there’s plenty of admirable things too. Taxes pay for road improvements, scientific study, safety regulations, product regulations, law enforcement, welfare, education, business initiatives, historic preservation, etc. By refusing to pay them I’m sticking it to way more people than just “the Man”.

Perhaps in the future we’ll have the technology dialed in so people can allot tax money to their pet preferences and a way to track the initial and long term consequences of that spending. But that would probably kill many ideological biases people cling to. What if a better world is not based on spending money on wars and social programs but improving the life of cats?

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